In the biggest overhaul of higher education in a generation, the federal government will deregulate tuition fees, and expose universities to full competition.

But the government has risked the success of its market-based reforms by simultaneously slicing $4 billion from higher education and loading more costs on students.

It will cut course subsidies by an average 20 per cent – forcing universities to pass the cost onto students – and will raise the cost of income-contingent student loans, commonly known as HECS.

In Tuesday’s federal budget, Education Minister Christopher Pyne said that from January 2016 non-university institutions offering higher education courses, such as private colleges and TAFEs, would receive Commonwealth subsidies for courses as recommended by the recent Kemp-Norton review of university funding.

The subsidies will be extended to include “sub-degree” courses, which will assist students doing preparation courses for university. All students in subsidised courses, including those at private colleges and TAFE, will be eligible for HELP loans.

January 2016 is also the start date for a fully competitive market in higher education when all providers – universities, private colleges and TAFEs – will be able to set their own course fees.

The government will mandate that 20 per cent of the additional revenue raised from higher fees be used to fund Commonwealth scholarships to support disadvantaged students.

Students who are studying, or who have now accepted and deferred a course offer, will continue to be charged current fee levels, as long as they have completed their course by December 2020.

The government says 80,000 students will benefit from the extension of course subsidies, which will cost $820 million for the first three years.

However the government also announced it would take back more than $4 billion net from higher education over the next four years, most of which will be a direct cost to students.

The threshold annual income for repayment of HELP loans will be cut by 10 per cent from the current $51,309 to $46,179, and the interest rate paid by students will rise from the CPI (equivalent to a zero real rate) to the 10-year bond rate paid by the Commonwealth on its borrowings, up to a maximum of 6 per cent.

The government will also end some HELP discounts but will benefit students by cancelling loan fees on some types of the loans. The HELP changes alone will save the government $2.8 billion net over the next four years.

Funding for the research training scheme, which aids research students, will be reduced by $170 million, and universities will be allowed to charge fees for research degrees – a blow to research students and university research programs.

Other changes to research funding will take out more than $300 million net over the next four years.

Universities will be particularly disappointed that the government has extended the National Collaborative Research Infrastructure Scheme, which funds much of Australia’s most key research facilities, for only one year.

Just last week Mr Pyne attacked the former Labor government for exposing the program to a “funding cliff”.

By supplying $150 million for only one year, he has moved the cliff, but left research institutions uncertain how to continue paying for their existing infrastructure.